Chrysler’s Owners Are Racing for the Cliff

James Dean and Natalie Wood in “Rebel Without a Cause.” Now Chrysler is playing chicken.Credit
Everett Collection

What do you call the man who is trying to sabotage Chrysler’s initial public offering by threatening to harm the company, perhaps fatally, if the offering is completed?

You call him Chrysler’s chief executive.

There has never been a proposed I.P.O. like Chrysler’s.

How is it different?

First, the preliminary prospectus filed by the company this week has only one underwriter listed, JPMorgan Chase. A typical offering by a large company will have at least a few underwriters. Every investment bank wants some of the profits, and the company wants maximum distribution. When General Motors, out of bankruptcy and newly profitable, went public in 2010, 10 underwriters were listed on the first prospectus, including all the big ones. Many more were added before the offering took place.

Here, it is quite likely that the rest of Wall Street stayed away because they feared alienating the very company whose stock was being sold.

Second, the G.M. prospectus, as with every other I.P.O. prospectus I have ever seen, tried to put its best foot forward. Within the bounds of securities laws, the prospectus writers did their best to attract investors. Chrysler’s, within the same bounds, is clearly aimed at alienating investors.

As such, it may become something of a collector’s item. A game of chicken between Chrysler’s two owners — Fiat, the Italian automaker, and a trust that provides benefits to Chrysler’s retirees — has burst into the open.

Each thinks the other is being unfair and is using threats to force concessions. If no one backs down, it is quite possible the company could be destroyed — something that would be disastrous to both. Each seems to be confident that the other will give in eventually.

But games of chicken can get out of hand.

The 2009 bankruptcies and bailouts of Chrysler and G.M. were messy. Some creditors were outraged, contending that they deserved more and that unionized workers deserved less. In both companies, the Treasury and trusts for workers’ benefits wound up owning big stakes.

At Chrysler, which was woefully mismanaged by its two previous owners — Germany’s Daimler and Cerberus, the American private equity firm — the Obama administration concluded that the company’s best hope for survival was to find an automaker with a high-quality management team that could be a valuable partner for a company that had been left with no presence outside North America. Fiat was interested and seemed ideal. It had no United States presence and had technology Chrysler could use. Chrysler had technology Fiat could use. Sergio Marchionne, Fiat’s chief executive, became Chrysler’s chief executive as well.

Most of Chrysler’s stock was owned by a retiree trust, a voluntary employee benefits association, or VEBA. The United States and Canadian governments had stakes as well — thanks to their bailout — and Fiat had a stake.

The combination seems to be working well, benefiting both companies. Chrysler is doing better than the parent these days, and in the end it may turn out that Chrysler will have rescued Fiat as much as or more than Fiat rescued it.

That Chrysler seems to be outperforming Fiat now may, however, say more about geography than competitiveness. The American car market is surging, while the Western European market is in a deep recession. In Italy, Fiat’s home market, new-car registrations are running at the lowest level in more than 30 years.

No one doubts that the two companies need each other, or that Fiat wants to buy the rest of Chrysler. And that is where the game of chicken is being played.

Photo

A game of chicken between Chrysler's two owners — Fiat and a trust that provides benefits to Chrysler’s retirees — has burst into the open. Here, Sergio Marchionne, chief executive of both Chrysler and Fiat.Credit
Marco Alpozzi/PRESL, via Associated Press

Under agreements that appear to have been poorly drafted, Fiat has a right to buy a substantial part of the VEBA’s interest every six months. The price is determined by a complicated formula that is supposed to represent what a market price for the stock would be if it were public.

It looks as if that formula may not be doing a very good job. When Fiat tried to make the first purchase last summer, it calculated the price as being about a third less than what it had voluntarily paid the Treasury a year earlier in a negotiated deal. The VEBA said the formula, under its interpretation, called for a much higher price. They went to court in Delaware to hash it out.

A ruling this summer gave Fiat a victory on important parts of the case but left others for a future trial. One detail still to be determined is whether the formula allows Fiat to use extraordinary losses to reduce the price it has to pay while ignoring similar gains that would raise the price. That seems to hinge on the meaning of a word (“charge”) that went undefined in the original document.

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There are more such purchases scheduled to happen. For the VEBA, avoiding the formula might be very helpful. And the agreement provides that the formula vanishes with an I.P.O. After that, the market price would be used.

That is one reason that the VEBA may have had for exercising its right to sell some of its stock in an I.P.O.

Another may be that it knows Fiat does not want such an offering because it wants to buy the entire company. Perhaps Fiat would agree to a deal setting a better price to avoid such an offering.

Fiat did not give in. Instead, it appears to be trying to scare off any prospective investors.

The Chrysler prospectus, after saying the alliance with Fiat is “critical for us to compete with our larger and better-funded competitors,” says that in light of the proposed offering, “Fiat has informed us that it is reconsidering the benefits and costs of further expanding its relationship with us and the terms on which Fiat would continue the sharing of technology, vehicle architectures and platforms, distribution networks, production facilities and engineering and management resources.”

Translation: “Buy the stock and it might become worthless.”

Then there is the obvious fact that if the offering is ever priced, it will be at a price that Mr. Marchionne is unwilling to have Fiat agree to pay. When was the last time you saw a chief executive say his company was offering stock at an excessive price?

Will the VEBA really risk rendering its primary assets worthless by proceeding with an offering Fiat opposes? Would Mr. Marchionne really cancel the alliance and severely damage both companies? Does each side believe the other is bluffing?

There is little doubt that it is in the interests of both the VEBA and Fiat for all the stock to be sold to Fiat. But there is clearly a wide disagreement on price, which has led to the game of chicken.

Perhaps it is fitting for an auto company to be torn apart by such a game. Remember that the original introduction many of us had to the game was in the 1955 James Dean movie “Rebel Without a Cause.” In that movie, Dean’s character engages in a contest with another teenager played by Corey Allen. They each take stolen cars and steer them toward a cliff at high speed. The first one to jump is a chicken.

Chrysler then, as now, was a distant third among American automakers. The Dean character stole a Ford. His rival stole a Chevy. Chrysler cars were ignored.

Surely neither the VEBA nor Fiat would let this game of chicken get out of hand. Each of them appears to be betting that the other will back off before a disaster takes place.

In the movie, that does not happen. The Allen character dies.

It was a fascinating and horrifying movie. This battle could yet be equally riveting.

Floyd Norris comments on finance and the economy at nytimes.com/economix.

A version of this article appears in print on September 27, 2013, on Page B1 of the New York edition with the headline: Chrysler’s Owners Are Racing For the Cliff. Order Reprints|Today's Paper|Subscribe